Make no mistake. We are witnessing a high-stakes protocol standards
battle play out in real time. And it is just as important as last
century’s battle for the internet’s TCP standard.

Current capacity constraints on the Bitcoin blockchain have brought us to this impasse.

The
Bitcoin protocol, as the dominant value transfer “network effect”
leader, battles against upstart cryptocurrency protocols like Ethereum
and Monero. But it also battles with itself as divergent forces push for
either on-chain scaling or off-chain scaling, hard fork or soft fork, SegWit transaction format or original transaction format.

The
so-called nuclear option is a prolonged, contested hard fork of the
Bitcoin blockchain because it risks splitting the network into two
competing chains, which is to no one’s benefit. Therefore, it should be
reserved as a planned formality or a last resort for extreme situations
rather than a perpetual form of “live” dispute resolution.

With so
much individual and institutional wealth essentially stored on the
Bitcoin blockchain, it can be extremely disconcerting when others try to
“fork” around with your money. Chronic forking is not synonymous with
wealth management and prudent capital accumulation, which require
stability and predictability. Importantly, smart contracts and
non-monetary applications will also rely upon relative stability since
the same native digital token also facilitates the proof-of-work
security model.

This article will examine how open-source
governance was designed to work within the Bitcoin protocol and how
users, miners and developers are locked in a symbiotic dance when it
comes to potential forks to the immutable consensus. Solutions will be
proposed and analyzed that maintain the decentralized nature of the
resulting code and the blockchain consensus, while still permitting
sensible protocol upgrades. Governance is not only about the particular
method of change-control management, but also about how the very method
itself is subject to change.

Open-Source Protocols and Bitcoin

Generally
referred to as FOSS, or free and open-source software, this source code
is openly shared so that people are encouraged to use the software and
to voluntarily improve its design, resulting in decreasing software
costs; increasing security and stability, and flexibility over hardware
choice; and better privacy protection.

Open-source governance
models, such as Linux and BitTorrent, are not new and they existed prior
to the emergence of Bitcoin in early 2009; however, they have never
before been so tightly intertwined with money itself. Indeed, as the
largest distributed computing project in the world with self-adjusting
computational power, Bitcoin may be the first crude instance of A.I. on
the internet.

As
a blockchain community grows, it becomes increasingly more difficult
for stakeholders to reach a consensus on changing network rules. This is
by design, and reinforces the original principles of the blockchain’s
creators. To change the rules is to split the network, creating a new
blockchain and a new community. Blockchain networks resist political
governance because they are governed by everyone who [participates] in
them, and by no one in particular.

Murck continues:

Bitcoin’s
ability to resist such populist campaigns demonstrates the success of
the blockchain’s governance structure and shows that the ‘governance
crisis’ is a false narrative.

Of course it’s a
false narrative, and Murck is correct on this point. Bitcoin’s lack of
political governance is Bitcoin’s governance model, and forking is a
natural intended component of that. “Governance” may be the wrong word
for it because we are actually talking about minimizing potential
disruption.

Where Bitcoin differs from other open-source protocols
is that two levels of forking exist. One level forks the open-source
code (code fork), and another level forks the blockchain consensus
(chain fork). Since there can only be one consensus per native digital
token, chain splits are the natural result of this. The only way to
avoid potential chain splits in the future is to restrict the
change-control process to a single implementation, which is not very
safe nor realistic.

Core development teams are a potentially dangerous source of centralization.

When it comes to Bitcoin Core,
the publicly shared code repository hosts the current reference
implementation, and a small group of code committers (or maintainers)
regulate any merges to the code. Even though other projects may be more
open to criticism and newcomers, this general structure reminds me of a
presiding council of elders.

Making hazy claims of a peer-review
process or saying that committers are just passive maintainers merely
creates the facade of decentralized code. The real peer-review process
takes place on multiple community and technical forums, some of which
are not even frequented by the developers and Bitcoin Core committers.

The BIP (Bitcoin
Improvement Proposal) process is sufficient and it’s working for those
who choose to collaborate on Bitcoin Core. Similar to the RFC (Request
for Comments) process at
the IETF, BIP debates about a proposed implementation can provide
technical documentation useful to developers. However, it is not working
for many involved in Bitcoin protocol development due to the advantages
of incumbency and the false appeal to authority with core developers.
If Bitcoin Core no longer maintains the leading reference implementation
for the Bitcoin protocol, it will be 100 percent due to this
intransigence.

Sensitive to the criticisms of glorifying Bitcoin Core, Adam Back of Blockstream recently proposed an option to freeze the base-layer protocol,
but at the moment that will only move all of the politics and
game-playing to what exactly the base-layer freeze should look like. It
is a nice idea for separating the protocol standard from a single
reference implementation and for transitioning the Bitcoin protocol to
an IETF-like structure, although it’s extremely premature for now.

Therefore, by default, that leaves us with several alternative Bitcoin implementations in an environment of continual forking.

Even Satoshi Nakamoto was critical of multiple consensus implementations in 2010:

I
don’t believe a second, compatible implementation of Bitcoin will ever
be a good idea. So much of the design depends on all nodes getting
exactly identical results in lockstep that a second implementation would
be a menace to the network.

“All code that impacts consensus is part of consensus,” Voskuil told Bitcoin Magazine.
“But when part of this code stops the network or does something not
nice, it’s called a bug needing a fix, but that fix is a change to
consensus. Since bugs are consensus, fixes are forks. As such, a single
implementation gives far too much power to its developers. Shutting down
the network while some star chamber works out a new consensus is
downright authoritarian.”

Multiple alternative implementations of the Bitcoin protocol strengthen the network and help to prevent code centralization.

Politics of Blockchain Forking (or How UASF BIP 148 Will Fail)

Contentious
hard forks and soft forks all come down to hashing power. You can
phrase it differently and you can make believe that two-day zero-balance
nodes have a fundamental say in the outcome, but you cannot alter that
basic reality.

A BIP 148 fork
will undoubtedly need mining hash power to succeed or even to result in a
minority chain. However, if Segregated Witness (SegWit) had sufficient
miner support in the first place, the BIP 148 UASF itself would be
unnecessary. So, in that respect, it will now proceed like a game of
chicken waiting to see if miners support the fork attempt.

Mirroring
aspects of mob rule, if the UASF approach works as a way to bring
miners around to adopting SegWit, then the emboldened mob will deploy
the tactic for numerous other protocol upgrades in the future. Consensus
rules should not be easy to change and they should not be able to
change through simple majority rule on nodes, economic or not.
Eventually, these attempts will run headfirst into the wall of Nakamoto consensus.

As far as the network is concerned, it’s like turning off the power to your node.

UASF BIP148 Nodes (1st August 2017)

There
is no room for majority rule in Bitcoin. Those who endorse the UASF
approach and cleverly insert UASF tags in their social media handles are
endorsing majority rule in Bitcoin. They are providing a stage for any
random user group to push their warped agenda via tyranny of the nodes.

The prolific Jimmy Song says that having real skin in the game is what matters:

Let’s
keep “majority rule” antics out of Bitcoin. There is no protocol
condition that activates “if we are all united” and that is a good
thing.

With enough hashing power, the mob-induced UASF BIP 148
will lead to a temporary chain split. However, the probability of a
Bitcoin minority chain surviving for very long is extremely low due to
the lengthy difficulty re-targeting period of 2,016 blocks. Unlike the
Ethereum/Ethereum Classic fork, that is a long time for miners to invest
in a chain of uncertainty.

Responding to a Reddit post for newbies who are scared of losing money around the 1st of August due to UASF, ArmchairCryptologist explains:

Your
advice is sound, but realistically, the most likely scenario is that
the UASF either wins or dies. If it gets less than ~12% of the hashrate,
it will not be able to activate Segwit in time, and it will almost
certainly die. If it gets less than ~20% I also wouldn’t be surprised to
see active interference with orphaning to prevent transactions from
being processed.

If on the other
hand it gets more than ~40% of the hashrate, the chance for a reorg on
the other chain is large enough that most miners will likely jump ship,
and it will almost certainly win. At over ~20% block orphaning attacks
won’t be effective, as it would split the majority chain hashrate and
risk tipping the scale. Which means that the only situation where you
will realistically have two working chains for an extended period is if
you get between ~20% and ~40% of the hashrate for the UASF.

The
collectivist UASF BIP 148 strategy will ultimately fail and that’s a
good thing. It is driven primarily by those with very little at stake
expecting the miners to stake everything by supporting a minority chain.
Pretty soon, you run out of other people’s money. This commenter on Reddit understands:

The
entire premise was that it was very cheap to switch, but very expensive
to stay. That’s when I realized the folly of it all; [it’s] only cheap
because they’re not staking anything. But someone has to stake
something.

And that’s what is going to cause it to fail. That and the lack of replay protection. People like this guy flip it around and genuinely believe the mining problem will
be solved by massively increased value. If they do somehow put enough
pressure on exchanges that list UASF, despite the lack of replay
protection, and if we take his logic a step further, UASFers are going
to be pushing everyone to “buy, buy, buy” UASF and “sell, sell, sell”
Legacy Coin. But without replay protection, they’re going to be
obliterated by a few smart people who realize there are huge gains to be
had.

Alphonse Pace has an excellent paper describing
chain splits and their resolution. He walks us through compatible,
incompatible and semi-compatible hard forks, arguing that users do have
power if they truly reject a soft-fork rule change:

…
users do have power — by invoking an incompatible hard fork. In this
case, users will force the chain to split by introducing a new ruleset
(which may include a proof-of-work change, but does not require one).
This ensures users always have an escape from a miner-imposed ruleset
that they reject. This way, if the economy and users truly reject a soft
fork rule change, they always have the power to break away and reclaim
the rules they wish. It may be inconvenient, but the same is true by any
attack by the miners on users.

The Future of Coordinating Protocol Upgrades

What group determines the big decisions in Bitcoin’s direction? Ilogy doubts that it is the developers:

Theymos
almost completely foresaw what is happening today. Why? Because Theymos
has a deep understanding of Bitcoin and he was able to connect the dots
and recognize that the logic of the system leads inevitably to this
conclusion. Once we add to the equation the fact that restricting
on-chain scaling was always going to be perceived by the ‘generators’ as
something that ‘reduces profit,’ it should be clear that the logic of
the system was intrinsically going to bring us to the point we find
ourselves today.

Years later these two juggernauts
of Bitcoin would find themselves on opposite ends of the debate. But
what is interesting, what they both recognized, was that ultimately big
decisions in Bitcoin’s direction would be determined by the powerful
actors in the space, not by the average user and, more importantly, not
by the developers.

The developer role can be thought of as
proposing a variety of software menu choices for the users, merchants
and miners to accept and run. If a software upgrade or patch is deemed
unacceptable, then developers must go back to work and adjust the BIP
menu offering. Otherwise, mutiny becomes the only option for
dissatisfied miners.

In “Who Controls Bitcoin?” Daniel
Krawisz says that the investors wield the most power, and because of
that, miners follow investors. Therefore, the protocol upgrades likely
to get adopted will be the ones that increase Bitcoin’s value as an
investment, such as anonymity improvements being favored over attempts
at making Bitcoin easier to regulate.

In the future, miner
coordination via a Bitcoin DAO (decentralized autonomous organization)
on the blockchain could be the key to smooth and uneventful forking.
Self-governing ratification would allow diverse stakeholders to
coordinate protocol upgrades on-chain, reducing the likelihood of
software propagation battles that perpetually fork the codebase.

Attorney Adam Vaziri of
Diacle supports a system of DAO voting by Bitcoin miners to remove the
uncertainty around protocol upgrades. He readily admits that he has been
inspired by Tezos and Decred.

Prediction
markets have also been proposed as a method to gauge user and miner
preferences through public forecasting, the theory being that these
prediction markets would yield the fairest overall consensus for
protocol upgrades prior to the actual fork.

The question remains:
Is coin-based voting based on allocated hash power superior to the
informal signaling method utilized today? Are prediction markets or
futures markets a viable method to gauge consensus and determine
critical protocol upgrades?

I’m not optimistic. On-chain voting
and “intent” signaling are both non-binding expressions while prediction
and futures markets can be easily gamed. Therefore, while Tezos and
Decred represent admirable efforts in the quest for complete resilient
decentralization, I do not think Bitcoin protocol upgrades of the future
will be managed in this way.

The Bitcoin ecosystem doesn’t need to achieve a social consensus prior
to making changes to the protocol. What has clearly emerged from the
events of this summer is that Bitcoin has demonstrated an even stronger
degree of immutability.

There is no failure of governance and there is no failure of
the market. The non-authoritarian forces at play here are functioning
exactly as they should. Protocol upgrades in a decentralized environment
are an evolutionary process, and that process has matured to the current six stages of Bitcoin protocol upgrading, with some optional variances for BIP 91:

(b) Informal intent signaling based on miners inserting text into the coinbase for each block mined;

(c) Block
signaling period where miners formally signal a designated “bit”
trigger for BIP lock-in, based on “x” percent over a “y” number of
blocks period;

(d) Block activation period after BIP lock-in,
which sets a secondary period of “x” percent over a “y” number of blocks
for activation;

(e) Primary difficulty adjustment period (2,016 blocks) where “x” percent of miners must signal for the upgrade to lock in;

(f) Secondary difficulty adjustment period (2,016 blocks) required for the protocol upgrade to activate on the network.

Conclusion

This would not be the first fork in Bitcoin and it won’t be the last. If we believe in the power of Nakamoto consensus and probabilistic security, then the secret to uneventful protocol upgrades is smoother and more reliable signaling by miners.

July
has been a tough month for Bitcoin, but it has also been pivotal. Even
though I doubt the probability of success for UASF BIP 148, some may say
that the threat of the reckless UASF on August 1 played a role in the
rapid timeline for SegWit2x/BIP 91, and I agree with that. Game theory
is alive and well in Bitcoin.

The design of Nakamoto consensus
provides the ultimate method for decentralized dispute resolution by
placing that decision with the hashing power and the built-in incentives
against 51 percent attacks. In fact, Tom Harding considers miners to be
the only failsafe in Bitcoin:

Tuesday, July 11, 2017

I first met my Globitex.com co-founders Liza Aizupiete and Andris Kaneps at an inspired café in central Copenhagen during early 2015. Their mantra has always been that Globitex is a trading platform built by traders for traders. Unsurprisingly, that guiding philosophy has permeated every design choice since inception.

As
my background is in foreign currency and derivatives trading, I have
always aimed to launch a cryptocurrency exchange. In fact, I worked on
putting together a Gibraltar-based investment group to purchase the
original Mt. Gox from Jed McCaleb in early 2011, however the market
proved too immature to finalise the reluctant investor commitments.

Since
that time, bitcoin and other cryptocurrency exchanges have matured
greatly, expanding into multiple trading pairs, margin trading, and even
derivatives trading. All of this innovation has led to increasing
liquidity and market depth for bitcoin trading as well ushering in the
sophisticated hedging and risk management strategies desired by
corporate treasurers.

So,
where does the bitcoin exchange industry go from here? It already
boasts one of the most predictable revenue streams in the Bitcoin
ecosystem with steadily increasing volumes that generate commissions in
both up and down markets. And liquidity is “sticky” giving incumbents a
distinct advantage. But, traders also have a multitude of choices with
at least 400 different exchanges and brokers around the world.

Three clear mega-trends
are emerging in the bitcoin exchange industry: (1) an explicit
distinction between global exchanges and local, or regional, exchanges;
(2) a tendency towards the introduction of clearing members to diffuse
the counterparty risk away from the exchange operator; and (3) increased
use of margin trading and futures and options contracts.

Globitex is uniquely structured to benefit from all three mega-trends.

A
global exchange aims to be a provider of maximum liquidity at the most
attractive spreads. It accomplishes this by facilitating ease of trading
for the greatest number of clients around the world, typically by
providing the most common international transfer capabilities and
trading pairs against the leading world reserve currencies.

Conversely, local exchanges
will focus on a specific jurisdiction and most likely localise the
language and the payment APIs for that audience specifically. Local
exchanges do not facilitate global price discovery and they vary by
operating model. In a broker model, the company buys and sells
cryptocurrency with customers by maintaining their own inventory book
and setting a bid/offer spread. Cryptocurrency brokers also do not hold
customer balances like they would under a commission-based,
order-matching exchange model.

With bitcoin, a clearing house
can be thought of as a wholesale liquidity provider clearing
transactions in an over-the-counter (OTC) market or a futures exchange.
The clearing house reduces the settlement risks by netting offsetting
transactions between multiple member clearing firms and by providing
independent valuation of trades and collateral accounts.

Today’s
bitcoin exchanges do not employ clearing members thereby consolidating
the counterparty risk into a single entity rather than diffusing it
among multiple clearing firms.

Globitex
will eventually introduce a program for member clearing firms to
process transactions on the exchange platform with Globitex monitoring
the credit worthiness of member clearing firms and, ideally,
establishing and maintaining a guarantee fund (for leveraged trading)
that can be used to cover losses that exceed deposited collateral from a
defaulting clearing firm.

In
the not-too-distant future, an exchange will have to provide adequate
margin trading on both the long and short side to be considered a viable
exchange contender. The market demands and pressures for leverage will
be too great for any exchange that wants to remain a liquidity leader.

Therefore,
to facilitate margin trading, Globitex will introduce a two-way
borrowing facility for bitcoin and fiat currency. Today, the most robust
bitcoin lending facility is offered through the Bitfinex exchange with
statistical data provided by BFXdata.

The
development of a true Bitcoin economy requires the formation of capital
markets with a corresponding interest rate duration curve across 1-day,
30-day, 90-day, and 1-year borrowing rates. Globitex will make a market
in fiat-to-XBT swaps and XBT-to-fiat swaps for purposes of margin
trading.

Additionally,
Globitex will aggregate the leading interest rate markets for bitcoin
to form a tradeable interest rate product on its exchange. Similar to
LIBOR, the aggregated reference rate will be referred to as BIBOR
[Bitcoin Inter-Broker Offered Rate], which is a term first coined in
CoinTelegraph, “Bitcoin Needs Its Own Version of LIBOR.”

Globitex
also intends to expand into standardised futures and options products
that allow risk managers and speculators to trade the bitcoin exchange
rate in the same way that they currently trade precious metals, equity
indices, bonds, grains, foods, livestock, and crude oil.

Inevitably, we will see new decentralised trading methods, trustless security models and multi-signature techniques, such as threshold signatures,
increasingly deployed to prevent against exchange hacks and exit scams.
However, the larger trend is still towards gaining multiple entry
points onto the exchange platform, because liquidity begets more liquidity.

Above
all else, an exchange is ultimately defined by its integrity and the
integrity of its principals over a demonstrated period of time.

Monday, July 10, 2017

London, United Kingdom July 10, 2017 (Newswire.com) - A European Bitcoin exchange platform Globitex has rolled out its beta release. Presently running in a limited beta, Globitex is accepting global customers on invitations only. The team includes the former executive director of The Bitcoin Foundation Jon Matonis, serving now as a Chairman at Globitex.

"Globitex is a genuine breakthrough for professional and institutional traders with full support for the FIX protocol and a slick UI. Traders will appreciate a platform designed by traders and the Globitex team has decided to start with the Euro-Bitcoin trading pair to be followed by other currency pairs and margin trading", states Jon Matonis.

Globitex has begun operations by offering a Euro-Bitcoin exchange product (XBTEUR), with an aim to expand fiat and cryptocurrency offering in the near future. Algorithmic trading is fully supported by FIX and REST API interfaces.

The team has been developing the product for the past three years with the goal of providing a more professional trading environment for institutional traders. As a startup, since early 2014 the project was self-seeded by the founders and in 2015 raised the first venture capital funding. The round was carried out by a group of private investors lead by an entrepreneur and venture capitalist Viesturs Tamužs. The company has raised more than EUR 900,000 to date.

“The Globitex team have built a solid exchange product, which is set to prove itself as a reliable service provider in this exciting and fast-paced cryptocurrency industry”, admits Viesturs Tamuzs.

The current Beta release offers to trade at 0% commission and is expected to run with this pricing until public launch. Deposits and withdrawals are available via SEPA and SWIFT.Source: Globitex.com

Thursday, May 11, 2017

We now
have Blockchain concepts surfacing for almost everything so of course
music was always going to be an attractive and obvious area to target.
There are many players in this space now and it has become very
fashionable.

But
there is one Company who’s founder has been actively exploring what the
future of music might look like for over 10 years, and since 2006 that
vision always hinged on the need for a global digital currency to
underpin a new model for music distribution. This vision was first
articulated several years before Bitcoin was invented. I’m talking about
Simon Edhouse the Managing Director of Bittunes.

Unlike
most other startups in this field, Bittunes is not basing their
business case solely on a technology like Blockchain, or by creating a
new alt-coin or token, (to their credit they rejected lucrative offers
to do so). Strategies like that are easy to duplicate so tend to occur
in clusters, as can easily be seen by the plethora of ICO’s and
Blockchain focussed startups around.

What
separates Bittunes from other startups that utilise blockchains in some
way, and why they are particularly interesting to me as an economist,
is that their core vision is based on a simple yet quite audacious
economic model, and the more I look at that model, the more it makes
sense.

The
Bittunes model expressly tries to do one thing. It attempts to define
the simplest mechanism for music to be traded as directly as possible
between Artist and fan, while at the same time re-configuring the reward
structures that have been the basis of the music industry for over a
hundred years.

Startups come and go, but good economic models tend to transcend changing fashions.

Historically
it has been the providers of physical and then digital music recordings
that have made money in the music business, and as a rule these have
been the intermediaries in music’s supply chain, Record Labels, Rights
organisations, Apple etc. It has never been the receivers of music that
made money. That just wouldn’t make sense, would it? Read on..

In
music’s value chain there have always been ‘rent seekers’, manoeuvring
to increase their share of the pie. Occasionally, disintermediation
occurs as layers are removed, creating new value, but more often than
not other layers are inserted as new entrants nudge their way in with
new services.

The
accepted view is that these entrants provide new value so of course
become part of the music industry ecosystem. However, there are now so
many heads in the trough, and the largest have been around for so long
that, collectively, their right to harvest more than 75% of music’s
overall pie has remained largely unchallenged.

The
big names in music, Justin Bieber, Rihanna, One Direction etc reap the
lion’s share of what remains, and the massive long tail of aspiring
Artists are left with the crumbs. Non main-stream artists do it for
love, not money, and music’s consumers devour heavily subsidised (free,
ad supported) streaming playlists thereby maintaining this status quo.

Artists produce, consumers consume, corporations get rich

So,
how can this cycle be broken, without business processes to drive any
commercial activity? So that consumers get much more variety and a
multitude of currently invisible artists get a more equitable deal.

The
power and appropriateness of the Bittunes model to help solve music’s
entrenched problems, is that firstly, it correctly identifies which
party can provide sufficient value to Artists to turn this inequitable
system on it’s head, and then, secondly, it meticulously deals with the
contingencies related to delivering that value via it’s business logic.

That
party in music’s value chain is of course the music fans themselves,
because music fans are not only the purchasers of music, (be it by
subscription to a streaming music service or downloads), they are also
the highly interconnected network that Artists need. They hold the keys
to some of the most valued processes on the internet, and drive the
value of companies like Google, Facebook etc, and in the Bittunes model,
they are the new recipients in, plausibly, music’s final
disintermediation.

The
novel aspect of the Bittunes model is that they have worked out a
sensible way to allow fans to earn money in partnership with the artists
they follow. Further, the process has been designed to distribute
revenue with as little cognitive cost for users as possible. In other
words, it’s not just the economic model that is simple and neat, the
logic around it has been carefully designed with a view to making it
nearly friction-less for all parties.

The
crux of the model is based on revenue sharing with meaningful clusters
of users. To explain exactly how that ‘meaningfulness’ is defined, and
how selection is determined, would be to give away too much, but let’s
just say there is an abundance of options available to both supply and
demand to self sort into appropriate groups, to generate remarkable
value to both.

Why was this inventive step not already completely obvious to all of us?

To
explain that, might require a bit of historic analysis. There is a
pervasive narrative with regard to music that is continually reinforced
in the media that the only music worth mentioning is that which is owned
and controlled by the music industry. For example:

“Today, three major Record labels own well over half of the Western World’s Music” ~ The Economist [1]

It’s
not hard to see how this situation has developed. The Recording
Industry as we know it grew out of the combination of sheet music
publishing of the music played at live music events, followed by the
technological breakthroughs of the 1880’s and 90’s that produced actual
recording devices, (cylinders of tin, wax, celluloid leading to the12
inch record in 1903 [2]). Gradually big business saw the opportunity for
large profits by the mass production of vinyl records, and the rest as
they say is history.

So,
throughout most of the late 20th Century, were it not for this
industry, popular music simply could not be easily heard or obtained. So
in a very real sense we have all perhaps been conditioned to see the
music industry and the music we listen to as inseparable, but does this
still even make sense?

It
should come as no surprise that with the advent of the Web and
internet, that some profound macro changes have been occurring that have
direct relevance to the empowerment of ordinary people in this new
global marketplace.

A better understanding of the rights of the ‘Primary Publisher’ and how Bittunes also sidesteps the copyright industry

One
of the tenets of the Bittunes team’s philosophy as they have
endeavoured to explain this model has been to stress the significance of
the role of the Artist as ‘Primary Publisher’. In the context of how
Bittunes operates, this alone has very significant implications for the
size of the total addressable market for the company’s services.

Legally, when an Artist writes a song, two rights are created; the right to the recording
(a.k.a. the master) and the right to the underlying song itself (a.k.a.
the publishing) [3]. Until an Artist signs away these rights to a
Publishing House or Record Company, they are the publisher.

Music
distributed by Bittunes is in fact ‘self published’ by Artists on the
platform using an inherent provision within the legal deed of Creative
Commons and applying that to the ‘Attribution-NonCommercial-NoDerivs CC
BY-NC-ND’ License whereby any of its conditions can be waived if
permission is gained from the copyright holder. In effect, this simple
caveat allows this license to be used for commercial purposes.

So,
what does this boil down to? It means that, whereas companies like
Spotify can only operate in a strictly defined set of territories,
Bittunes is free to sell music anywhere in the world, effectively
opening up a global market of billions of music consumers in territories
like China, India, Russia and Africa that services linked to the main
stream music industry are not able to access.

It
is interesting to note that Spotify’s recent purchase of
Music/blockchain startup ‘mediachain,’ after a bit of analysis, seems to
be less about innovation and more about the enormous difficulty Spotify
has had in keeping track of the myriad complex rights agreements that
apply to the music they stream. If anything it provides more evidence
that a new simpler approach to music publication is overdue.

As Simon pointed out in his recent article ‘What is the ideal Music Stack?’
most music blockchain startups are focusing on integrating with the
existing music industry in some way. The Bittunes thesis and strategy is
a purist approach that projects a future ideal reality and sets a
course toward that goal.

Needless to say, most entrepreneurs avoid challenges like this

The
mission that Simon and his team have embarked on is a David and Goliath
type quest, with one implied aim; to render the music industry as we
know it, irrelevant. To be able to deliver on a promise like this is
incredibly difficult, and requires skills, knowledge and intuition in a
number of areas.

However,
in this instance we have an entrepreneur who has significant domain
knowledge as an award winning songwriter and film music composer
himself, with a Master’s degree in science and technology
commercialisation and an obsession with disruptive innovation theory. He
has plenty of his own skin in the game, investing around $150k into the
business, and after several years of operation Bittunes now has users
in more than 90 Countries.

What
chance does it have of succeeding? In its favour, the technical and
market conditions have probably never been better, and certainly it is
widely understood that there is a pressing need to improve the fortunes
of Artists around the world.

However,
as is now also widely accepted, good entrepreneurs see realities that
other’s do not, and great entrepreneurs have the courage to pursue
opportunities that average entrepreneurs would never contemplate. My
money is on them succeeding.

Incidentally,
they are raising funds at the moment at a relatively low valuation, and
not as an ICO, but for real equity. A savvy hedge against the
prevailing orthodoxy with regard to the future of music IMO.

Disclosure: I am on the Bittunes board of directors and a shareholder in the company.

Wednesday, May 3, 2017

Former Bitcoin Foundation director Jon Matonis doesn't waste any time
asserting that his new employer is seeking to disrupt bitcoin's
established development process.

Matonis, who joined the secretive startup nChain today, is quick to
state that this is the ambition of the London and Vancouver-based
operation he now claims has 60 full-time employees, including infamous
developer Craig Wright.

As reported by Reuters,
nChain was started by Wright, the 46-year-old computer scientist who
claims to be bitcoin's pseudonymous creator Satoshi Nakamoto (though he hasn't offered much evidence).
To date, nChain hasn't offered much to support its assertions that it's
now the industry's best-funded startup either, hinting only that it has
received more than $100m from Malta-based high-tech private equity fund
SICAV plc as part of an acquisition.

Long the subject of criticism for the significant financial support
it provides to developers working on bitcoin's open-source protocol and
its primary implementation Bitcoin Core, Blockstream has been
villainized for that group's roadmap for scaling bitcoin, specifically
its decision to prioritize innovations that don't alter a hard-coded
limit on block size.

Matonis told CoinDesk:

"I immediately recognized nChain would be an effective challenger to Blockstream, which is definitely needed in the space."

In conversation, Matonis echoes a familiar refrain, that Blockstream and Bitcoin Core are too intertwined, and that Core's roadmap doesn't have broad community support.

London, United Kingdom May 2, 2017 – Blockchain
pioneer nChain announces the appointment of Bitcoin Foundation Executive
Director Jon Matonis as its new Vice President of Corporate Strategy.
In this position, Matonis will support nChain’s business growth by
developing commercial relationships, and evaluating opportunities for
strategic investments and acquisitions.

Jon Matonis is widely recognised as a leading Bitcoin researcher and
is a non-executive board director for several notable companies in the
space. Since 2012, his technology and security writings have appeared in
publications such as Forbes, CoinDesk, Bitcoin Magazine, American Banker, and PaymentsSource.

Jon is also a founding director for the Bitcoin Foundation which
served as the industry’s first nonprofit trade association originally
chartered to provide financial compensation for voluntary protocol code
developers and to promote the vision of Bitcoin worldwide. His career
has also included senior roles with Sumitomo Bank, VISA International,
VeriSign, and Hushmail.

Additionally, Matonis created the first and leading general price index for Bitcoin known as the Bitcoin Price Index
(BPI), hosted the largest ever Bitcoin/blockchain conference to date in
Amsterdam during 2014, and enlisted seven regional chapter offices to
the Bitcoin Foundation from countries such as France, Germany, and
Bangladesh.

Arthur Davis, Director of nChain Holdings Limited, comments:

“Jon was immediately attractive to nChain. During his notable career, he has consistently led the integration
of financial services and cryptography. His work has included foreign
currency trading for Visa International, financial platform sales for
RSA’s VeriSign – securing its first $5 million in revenue – and
end-to-end encrypted messaging for Hush Communications where as CEO he
recruited PGP’s Phil Zimmermann as Hushmail’s Chief Cryptographer.

“Jon’s philosophy for the Bitcoin protocol and network is fully
in line with nChain’s vision of on-chain scalability with
decentralisation, advanced native scripting for the construction of
smart contracts, and a dedicated move away from monolithic software. “We are excited to have Jon’s deep industry experience on our
team, and look forward to working with him to achieve our vision for the
Bitcoin blockchain.”

Bitcoin is the dominant value transfer protocol. The collective
computing power directed to its network is now 3.7 exahashes-per-second
and growing, making the Bitcoin blockchain best suited to directly
enable and facilitate nChain’s transformative vision.

In accepting the new management team position, Matonis comments:

“The resources and funding in place at nChain provide a unique
opportunity to reshape the existing landscape of Bitcoin protocol
influencers. It is imperative that we move towards a status quo where
the actual protocol standard is separated from its primary reference
implementation, similar to the existing architecture of the Linux kernel
and its low-level abstraction layer.”

In line with this view, nChain advocates for the formation of a
neutral standards organisation to coordinate and manage the Bitcoin
protocol and technical standards which in the long-term will result in a
more robust software design and a flourishing of compatible
implementations.

Matonis adds:

“The gradual elimination of trusted third parties from our
economic and legal infrastructures belies a serious and unprecedented
reorganisation of many legacy social structures. The winners will be
those select individuals and entities that finally liberate themselves
from the current centralising, rent-seeking chokepoints. I am excited
to work with nChain to support growth of the blockchain ecosystem for
everyone’s benefit.”

The quality and breadth of relationships that Matonis brings to
nChain allow the company to quickly ascertain and exploit available
market opportunities, and to assist its business partners to get up to
speed rapidly on the design and implementation of disruptive solutions
that challenge the traditional gatekeepers.

In his role with nChain, Matonis will also continue providing thought
leadership on blockchain technology. In 2011, Matonis was named Person
of the Year by Digital Gold Currency Magazine and in 2015 he was appointed to the Editorial Board for cryptocurrency and blockchain technology journal Ledger.
Currently, he is noted on the lists for both the Top 100 Fintech
Influencers and the Top 100 Blockchain Insiders in the Crypto Sphere.
For more information on Matonis, listen to his recent Virgin Podcast.

ABOUT NCHAIN: nChain is the global leader in
research and development of blockchain technologies – a distributed,
decentralised ledger that chronologically records transactions in an
immutable way. The nChain group of companies has grown to a team of in
excess of 60 world-class scientific research, engineering and other
professionals primarily based in London, United Kingdom and Vancouver,
Canada.

Blockchain Technology

The Bitcoin world is full of people who know nothing about economics or
cryptography; they only know that they could have made millions if they had
not sold at the bottom. These people tell themselves that they are redeemable,
that Bitcoin is just the MySpace of cryptocurrencies, that they will have
another opportunity to get in early on some other revolution. These people can
be dangerous, but most of them are easily preyed upon.

I think this may explain the origin of “blockchain technology”. It lets people
talk as if clones of Bitcoin are important without having to remind themselves
of Bitcoin. If someone says “blockchain technology” to me I give him the
benefit of the doubt and write him off as someone who doesn't know what he's
talking about. If I find out that he's intelligent, then he's most likely a
con artist.1

When people say “blockchain technology” to you, you can often replace it with
“mana”, or “chakras”, or “quantum” and it makes sense the same way.
“Blockchain technology” has evolved into a sound Bitcoiners use to extract
money from venture capitalists and one another, similar to the way that male
birds use a song to attract females. It's a phrase for people who know there
is a lot of money around, but don't exactly know where it's coming from.

I don’t see that there is a lot of use for some kind of general “blockchain
technology” outside of its application in Bitcoin. In Bitcoin, the blockchain
is a way of solving the double-spending
problem without
privileging any party as to the creation of new units or of establishing a
consistent history. This is an extremely costly and complicated way of
maintaining an accounting ledger. How often do I really need to do my
accountancy in this way? I would say that it is only a good idea when the game
being played is so important that no one can safely be put in the position of
referee. There are not a lot of things that I would really need that for, but
I think there is a good argument to be made that a blockchain is a reasonable
alternative to the monetary system under which the rest of the world is
currently oppressed. Otherwise I'd really rather be able to keep my accounting
records to myself rather than leaving them out in public.

There are no applications of blockchains which do not involve a
double-spending problem. A blockchain that was used for an application with no
double-spending problem is nothing more than a database, so you could just
replace it with a distributed hash table. People have also used the blockchain
for timestamping. This only works because Bitcoin has become well-known as a
point of reference. If you had a need for timestamps, you certainly wouldn’t
invent a blockchain to do it.

Yet people are running around everywhere in the Bitcoin world screaming
“blockchain blockchain blockchain” for all kinds of non-intuitive purposes
until they're buried under piles of money. I can't believe how long it's
taking for people to get wise to this ruse, but I hope it won't last too much
longer. A blockchain does not have a wide range of applications. However,
there is one application2, namely that of being a currency, which is
overwhelmingly important.

Money as a Hallucination

The foundational fallacy about money is to explain in physical terms what is
really a sociological phenomenon.3 Gold is not valuable because it
is durable, fungible, portable, and scarce; it is valuable because of a
beneficial and self-sustaining tradition in which it has a special place. The
physical properties of gold make such a tradition possible, but they do not
determine that it will arise; other goods with similar properties may also
become the traditionally established monetary good. Bitcoin is the same way, of course.
It could not run without the technology behind it, but what makes it important
is the fact that it is seen as having value, thus making it exchangable for
goods and services. People who think "blockchain technology" is important are
making the same kind of mistake as the people who think gold has intrinsic
value.

What's weird to me is that I know I have heard many people express correct
ideas about what money is and then look at me like I'm crazy when I seriously
consider the implications of what they said. I have heard people say to me
things like, “money is just a shared hallucination” or “the value of money is
whatever we all agree it is”. Yes! That is correct. That's exactly what I'm
saying. And if money is a shared hallucination, then you can’t replicate
Bitcoin’s value by replicating the technology. You would have to also
replicate the hallucination, which you can’t. You’ll have two blockchains, but
only one of them has a shared hallucination. This makes one of them valuable,
the other worthless.

If that seems like a strange claim, think about the alternative: it means that
it should be possible to create value for essentially no work. Every new
blockchain ever produced was built on the premise that you can create a
valuable investment that offers no income for the fixed cost of copying
Bitcoin with alterations.

There is nothing magic here. Human behaviors have real costs and benefits.
Money may be little other than a bunch of people attributing value to
something without much direct use. It doesn’t matter if this sounds
ridiculous; if there is a behavior that corresponds to this belief which
benefits people, then they will keep behaving that way. Other people had
better understand what they’re doing or else they will become relatively
poorer.

Money as a Behavior

The overwhelmingly most popular thing to do with gold is to store it away and
leave it for long periods of time. Therefore, an explanation for the price of
gold should mostly depend on the reasons someone would want something that
is good for being stored away, with some minor additions due to gold’s use as
jewelry and in industry. We can study money as behavior by abstracting away
all the uses of money other than that of storing it. No matter how silly that
sounds, we know that it must be good for something because people actually do
it and have been for some time.

When I talk about money as a
behavior
what that means is that everybody has a socially established number that is
objectively associated with them. They can show other people how much they
have, and everyone will agree as to what the number is. People can do
something which subtracts from this number and adds to another person’s
number. Also, people demand to have higher numbers. This means that they are
willing to give up other things in order to increase their number. If we know
the costs and benefits of increasing the number, then we can understand the
price of these numbers on the market.

There could be many reasons that people are able to behave in this way. The
numbers could correspond to amounts of a physical good, like gold or wampum,
which people physically pass among one another. They could correspond to
numbers which are managed and guaranteed by an institution, like dollars or
World of Warcraft gold; or it could be numbers that are stored in a blockchain
as in Bitcoin; or maybe we all just use the honor system and keep track of our
own balances and don't cheat.

Often, economists define money in a way that makes money a unique good in an
economy. I do not define money this way. There could be more than one good
which acts like money. Instead, I will show that in the long term I would
expect a single money to dominate.

The Risk of Money

Money is often explained in terms of the inconvenience of trading in a barter
system.4 While bartering might well be inconvenient, that alone is not
enough to explain the existence of money. It would certainly be nice if we
could all settle on a good to use as money. However, there is no guarantee
that everyone will be nice enough to do that. It is possible to imagine a
tribe of people who are all very good economists and who all understand and
like the idea of money, without having enough confidence in one another as
to get it working for real. The first person among them would be taking a risk
because he would have to work or sell his property in exchange for something
that's good for not much other than being stored. His risk would only pay off
if everyone else was willing to follow suit, and how could they possibly
guarantee to him that they really would do so?

For almost a year, this was what it was like in Bitcoin. Although Bitcoiners
suspected that Bitcoin could be money some day, its price was zero.
Consequently, it was completely useless as a form of money. For a long time,
Bitcoiners wanted the price to be higher than zero, but they could not make it
so just by wanting it. Bitcoin did not fundamentally change as a piece of
software when it first developed a price; the only thing that changed was
people's’ willingness to trade dollars for it.

In general, there is always an individual cost to accepting money, even when
the use of money is very widespread. If I work in exchange for money, how do I
know that money will still be valuable by the time work is out and I am ready
to do my shopping? If I work for something I can directly consume then at
least I can get some utility out of it no matter what. But if I accept
something whose main use is as a medium of exchange, then I am depending on
there being future people willing to accept that money later.

This is why people can't just will money into existence and why the
inconvenience of a barter system cannot explain the existence of money.
There's a risk. In order to explain why people would use money, we need an
individual benefit to match with the individual cost; otherwise people would
never prefer to use money no matter how socially beneficial it was.

The Utility of Money

There is an individual benefit to using money, and it’s very simple. The
person who accepts money gets to defer his decisions about what to buy to a
later time. Someone who does not want to use money must have a better idea
about what he is going to do with the goods he receives in payment than the
person who accepts money. When one has money, then one is not committed. If I
am the first person to accept money in payment and my bet on it pays off, then
I have the option to choose what I want later, and I do not have to choose
based on the limited information I have now. This benefit explains why someone
would want something that is good for keeping in storage. If he wants to keep
his options open, then he can open his vault the moment that the right
opportunity comes along.

I have now provided a trade-off which, I contend, explains the value of money.
I have not proved that there are no other costs and benefits to using money,
but I don't know of any others. If someone can show me that there is another
reason to hold money, please do. Now I'll talk about what this tradeoff
implies for the value of money.

The Value of Money

In this article, I mean value in the investment sense. So the value of money
is the purpose it serves in your portfolio and how much you would want. For
the investor, the value of money is determined by the tradeoff of commitment
versus optionality. If he wants more deferred choices, then he needs more
cash. If he wants more income, then he should get stocks or bonds.

The reason someone might want to defer his choices is because there are
limited periods of time in which investments go on sale. A difficult thing
about business is that it is easy to make mistakes whose consequences are not
evident until long after they are unavoidable. When that happens a business
needs cash in order to survive long enough correct itself. During these times,
good businesses can be bought cheaply for limited periods of time. This is why
an investor wants a cash balance ready to spend. You never know what is
coming, but if you have cash you are prepared for whatever it is. Holding a
stock is a commitment to a particular enterprise, whereas cash keeps your
options open.

The reason that buying an investment is a commitment is that you cannot always
sell an investment easily for cash. It might go on sale, just as in the
previous paragraph, and then the investor cannot get the same amount of cash
back that he put into it. If there is a crash, the investor might not be able
to follow through on his commitment and must sell at a loss. On the other
hand, an investor who can realistically make the commitment won't care so much
if there is a recession because he is prepared to weather safely through any
bad times.

The interesting thing about the tradeoff of optionality versus commitment is
that changes in the overall use of money in an economy can change the nature
of that tradeoff for an individual person. The more demand for money there is,
the less risky it is for an individual person to hold money. If you were the
first person to sell goods or labor for money, then you would probably look
insane or immensely stupid to bet that other people would want this stuff in
the future. On the other hand, if many people are using money, then you are
merely depending on there not being a hyperinflationary event in the immediate
future. In that case, you might look insane or stupid for worrying about such
a remote possibility at all.

In short, money becomes more useful the more people use it. This may seem like
a very obvious conclusion given how many words I took to arrive at it, but it
has some funny implications that are hard for a lot of people in Bitcoin to
accept because they have money riding on a presumption that the opposite is
true. As more people begin to hold money, the rational response of everyone
else is to try to hold more than they already have. Everyone, therefore, will
try to increase his cash balance at the same time, and they will do this by
bidding larger amounts of other goods in exchange for it. In other words, all
prices tend to go down, and money becomes more valuable. Effectively, everyone
ends up with more money, except that they end up with more valuable units of
money rather than higher sums of it; and furthermore they end up with larger
fractions of their portfolio in money as well.

The Network Effect

This is the opposite of how most investments work. If the price of a stock
goes up, then the value decreases because its dividend yield is smaller in
proportion to its price. If the price goes up too much, an investor would
eventually want to sell for something cheaper. By contrast, $100 worth of
bitcoins today has a better value than $100 worth several years ago, even
though the price of bitcoin is much greater. The value is better because there
are more opportunities to unload the bitcoins at the owner's discretion.

A positive feedback between price and value implies that the growth or
shrinkage of money can be self-sustaining. One might well find this conclusion
hard to accept. Afterall, value in a business is built by hard work and
careful strategy, whereas money can somehow drive its own value according to
me. I would invite anyone to explain Bitcoin’s value any other way. And saying
“bubble” doesn’t count because that’s virtually the same thing. Money is
basically a self-sustaining bubble. We don’t yet know if Bitcoin will arrive
at a self-sustaining state, and even if it doesn’t the “blockchain tech”
people are still wrong because in that case there would be no good blockchains
rather than one.

What would a self-sustaining bubble look like? Naturally, there must be a
limit to the growth of money. As the value of money increases, eventually the
individual benefits of holding more of it will go down. This happens as the
market cap of currency becomes a larger and larger fraction of the whole
economy. There are only so many errors that the economy produces for a
cash-holder to take advantage of. The economy becomes saturated with money
once there are enough investors sitting around with piles of money such that
they are able to catch all the errors that are worthwhile. At that point it is
no longer individually beneficial to hold more money even if the value of
money has gone up. This prevents the value of money from going up further
until more people or businesses are added to the economy.

This limit is independent of the underlying technology of the money. If people
were sufficiently honest, it could run on nothing but the honor system. Thus,
the value of money is a macroeconomic phenomenon, even for a tiny, quirky
cryptocurrency like Bitcoin. This is the reason why Bitcoin can be worthless
one year and valuable the next without a fundamental change to the software or
protocol, and why it can range in price by enormous margins over short periods
of time for reasons that seem inscrutable. It's because the value of money is
a shared hallucination, and the price is caused by the vividness of that
hallucination.

How Bitcoin’s Value Was Created

For a year after Bitcoin was first released, it had no price and was quite
worthless. Therefore, the value was not created when the software was
originally developed. It was caused by step-by-step investments that came
later. Since it first gained a price, Bitcoin has had periods of rapid price
increases. There can be events which are set off for no apparent reason in
which Bitcoin’s price drives itself rapidly up or down. A small price increase
is interpreted as an increase in demand. An increase in demand would mean that
bitcoin is becoming more useful and therefore more valuable. Hence, more
people buy in and cause another price increase. These manias make people
outside wonder if Bitcoin is for real. They make people who previously thought
that Bitcoin was stupid to think that they should maybe buy a little bit just
in case there could actually be something to it. In other words, they are
starting to think that Bitcoin is good for the only thing that money is
actually good for, which is to be kept just in case.

Above I wrote about the hypothetical idea of a tribe of economists who all
wanted to develop a money economy but could not because each felt the
investment to be too risky. Here is how they could solve that problem. They
could go around in a circle and take turns investing tiny amounts. Then none
of them has to take a big risk. Their economy would not be monetized after one
round, but they could see who among them was willing to take a small risk. If
they had all shown themselves willing to invest a little bit, then many of
them would be willing to risk a second round. If the game should proceed well,
the economists would start to think about how wealthy each would be if they
managed to get more than the rest. Soon the game would cease to be orderly as
they all tried to sell as much as
possible in
order to buy the new money while it was cheap.

Bitcoin did not arise out of a barter system. The dollar and the other
state-managed currencies had long since subsumed nearly all trade. However the
calculation of the initial investors to Bitcoin was very similar to that which
faced the economist tribesmen. It was clear to many that Bitcoin would be cool
if you could actually buy things with it. However you can’t buy anything with
it and its investment prospects depend on the presumption that it somehow one
day will be demanded in exchange for goods. How could one even estimate the
risk of such a possibility? The fact that other currencies already existed
does not change the problem. From the perspective of a Bitcoin investor,
Bitcoin might well have existed in a barter system in which Dollars, Yuan,
Euro, Pound, and Yen were traded rather than tea, silk, salt, and flint. The
only difference is that the national currencies are better competitors than
tea or salt, so the risk is greater than if Bitcoin had arose in a real barter
system.

Competing Currencies

I'm not against competing currencies in the sense of thinking people should be
physically prevented from creating them. I am against competing currencies in
the sense that I think currency competition is inherently monopolistic and
that it is extremely dishonest or stupid to promote a new currency as an
investment without taking this reality into account. So I am against competing
currencies in the sense that someone who creates a new currency had better be
able to present a case that his idea is capable of replacing the current
system, and should be treated as a con artist otherwise.

The fact that money has a positive feedback between demand and value implies
that there cannot normally be a stable equilibrium between two moneys. Any
initial imbalance between them would tend to expand. If one currency was
slightly more preferred than the other, people would react to this by
demanding slightly more. This makes the preferred even more preferable than
before. Any two moneys will interact in this way, thus leaving one to dominate
the rest.

Many people get fooled upon first entering Bitcoin because they think
diversification is important. The problem with diversification is that it is
possible to create an infinite amount of bullshit at no cost, and if you
diversify into that you lose everything. Diversification only makes sense
among investments which are not bullshit. If we were looking at a bunch of
stocks that all already paid dividends, then diversification would make sense.
On the other hand, there are potentially an infinite number of
scamcoins.
During late 2013 and early 2014, new ones were being produced and hawked every
day. They can be produced at this rate until everyone who thinks
diversification is a good idea goes broke. Now that all the dumbest people
have gone broke, the focus has shifted to using “blockchain tech” to exploit
ignorant venture capitalists.

There is always some risk in accepting money in payment, even something very
well-established like dollars. If everyone settles on the same money, then
they have coordinated so as to reduce that risk as much as possible. If you
expect people to use two currencies, you have to have some reason that both
would offset risk in different ways. I have never seen an altcoiner or
“blockchain tech” enthusiast come anywhere near to addressing this issue.
Clearly, if two currencies are virtually identical, such as Bitcoin and
Litecoin, then whichever currency is bigger has the advantage. Recently,
Litecoin’s price has decoupled from Bitcoin’s somewhat, so maybe people have
finally figured this out. Once Litecoin loses its shared hallucination, no
amount of sloganeering will bring it back.

But what about something more elaborate? Let’s pretend for a moment that
Ethereum actually
worked and was
actually something that competed with Bitcoin on some level. Do its smart
contracts give it a serious advantage over Bitcoin? I don’t see how Ethereum’s
smart contract system would tend to bring in opportunities to unload ethers
which are superior to the opportunities provided by Bitcoin. No matter how
cool smart contracts sound, they make Ethereum just another appcoin, and as
with other appcoins, people will reduce the risk of holding them by not
holding them, or holding them for as short a time as possible. This will
drive the price
down until they
are useless in trade.

By the way, I would prefer to be called a “Bitcoin minimalist” rather than a
“Bitcoin
maximalist”
because the other blockchains appear useless and are easliy eliminated.

Bitcoin Versus the Dollar

On the other hand, Bitcoin improves over the dollar (and other fiat
currencies) where it actually counts. The dollar is not very good for storing
“just in case”. Over long periods, it loses value due to inflation. You can’t
carry cash around or the police will take it, and if you leave it in a bank,
you can have your account frozen and the money drained if you use it for
purposes deemed unacceptable. You cannot own dollars the way that you can own
bitcoins. It is not that Bitcoin comes at no risk; it is rather that you can
always expect to have the same fraction of the total later on, if you secure
them properly.

The national currencies are affected by forces which are beyond your knowledge
or control. They are managed by committees serving the governments issuing
them. The people on these committees speak in a jargon that is not only
incomprehensible to most people, but unbearably dull even to those who do
understand it. Everyone is affected by them, but most people will not bother
to learn to understand them. They manage the currency in the national
interest, which is not always the same thing as your interest. They can
change the rules about how the currency can be spent you can use them or
increase the government’s supply. 5 It is usually not possible to predict
what they will do, at least over long time spans.

This is not possible under Bitcoin’s current
rules,
and it would be difficult to change them in ways that might eventually enable
anything similar. Although many new bitcoins will be created in the future,
the release schedule is publicly known, and is therefore already priced into
current Bitcoins. Therefore Bitcoin will not lose value as a result of
inflation. It might lose value as a result of losing popularity, and this risk
is greater than that of the dollar’s (at the moment).

Thus there is a genuine qualitative difference between Bitcoin and the dollar,
from an investment standpoint. It doesn’t mean that Bitcoin will necessarily
defeat the dollar. It just means that Bitcoin has a relevant competitive edge.
There are still significant disadvantages to Bitcoin; it is slow to confirm
and difficult to maintain anonymity. However, Bitcoin has done well against
the dollar so far and there is real-world commerce that has grown to rely on
it. In addition, every time bitcoin grows, its risks decline relative to the
dollar’s.

Final Thoughts

The reason, therefore, that the
monetary
aspects of Bitcoin are particularly interesting is the possibility that
Bitcoin could become the preferred good for being stored away. If it did, then
its value would grow until it was a significant part of the world economy.
That would be a significant change for the world and for Bitcoin’s early
adopters. Call me crazy, but I think that possibility has more portent than
the possibility of applications of blockchains outside of Bitcoin, and is a
lot more likely, too.

Bitcoin the protocol is like a great work of engineering. Its pieces are all
adapted to its function. It is not the technology, but what the technology
enables, that is most interesting. The blockchain as a concept had no reason
to escape the esoteric circles of developers and engineers. Yet when people
looked at Bitcoin, the only terms by which they knew how to understand it was
as a new technology. But Bitcoin is more like a new tradition than a new
technology. It is as if a small section of the crowd in a packed stadium has
started to do the wave, and you can bet on whether the wave will eventually
fill up the entire stadium.

If someone says “blockchain tech” to you, you might as well walk away right
there.6 They’re just trying to sell you on their new
decentralized
crowdfunded blockchain tech internet of bitthings appscam. You know that
they’re lying because everyone who acts like them is a liar and someone who
was not a liar would actually do something to distinguish himself from them.
Someone who knew what he was talking about would know that you can’t just
string a bunch of buzzwords together in order to generate an idea that makes
sense. Unfortunately, if a lack of basic critical thought is widespread, and
if everyone becomes invested in everyone else’s
stupidity, then
nobody wants to know either, at least not before they’ve found a favorable
time to exit their position. This will probably never happen because although
they may think they’re preying on other people’s stupidity, they are more
likely being preyed upon instead.

On the other hand, just because someone is dumb does not mean that he is
not a con artist. Based on my experience in Bitcoin, I think that many con
artists have an instinct to remain as stupid as possible about how they get
money so that they can keep believing that they are brilliant entrepreneurs. ↩

The theory I am presenting in this article is the Austrian theory of money.
To learn more about this idea, consult any standard Austrian tome, such
as Murary Rothbard's
Man, Economy, and State
or Mises's Human Action. ↩

When Austrian economists say barter system all they mean is an economy
in which no good is used as money, even though the term has much more specific
connotations for many people. ↩

In the US, it is really congress and the executive branch changing the
rules, and the Federal Reserve changing the supply. This distinction doesn’t
really matter for the purposes of this article, but some people think it’s
important because the federal reserve is designated as a private institution,
whereas congress is composed of elected representatives. ↩

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About Me

I am an e-Money researcher and a Founding Director of the Bitcoin Foundation. My career has included senior influential posts at Sumitomo Bank, VISA, VeriSign, and Hushmail.

"Free-market protagonists, such as Matonis, regard cybercash as better than traditional government-issued or -regulated money, because it is determined by market forces and thus nonpolitical in nature." --Robert Guttmann, Professor of Economics at Hofstra University, in Cybercash: The Coming Era of Electronic Money, 2002

"Matonis is quite correct that the new technology makes easier the use of multiple private currencies." --Mark Bernkopf, Federal Reserve Bank of New York, in "Electronic Cash and Monetary Policy", 1996

"Matonis argues that what is about to happen in the world of money is nothing less than the birth of a new Knowledge Age industry: the development, issuance, and management of private currencies." --Seth Godin in Presenting Digital Cash, 1995